Well our call last week that said investors should avoid Chinese stocks on a near-term basis because they had become EXTREMELY overbought has worked out quite well. The Shanghai Index fell 4.5% last night...and has declined 6.7% since we made that call. Last night’s powerful drop in the overseas markets has the domestic futures trading lower as well. The tech laden Nasdaq futures are falling twice as much as the S&P futures on a percentage basis...as Twitter (TWTR) is getting hit by more than 4% in pre-market trading hard after they were hacked in a Bitcoin scam.

This is an inopportune time for this kind of development...as the tech sector was already dealing with some very poor action this week...especially in the mega-cap tech names. As we all know by now, many of those names saw major downside reversals on Monday...so if they break below their Monday lows, it’s going to take a lot of wind out of the “momentum sails” for these stocks for a while.

We’d also note that most of these mega-cap tech names saw very feeble bounces yesterday during the strong pop in the broad market. Even Apple (AAPL) was only able to bounce 0.69%...even though they got some very good news on the regulation front out of Europe. In fact, both Microsoft (MSFT) and Amazon (AMAZN) actually closed the day in negative territory! If more of these names start to break below their Monday lows...especially if they break those lows in any meaningful fashion, it’s going to create some material selling pressure from the momentum players very quickly. In other words, our call for a 20% correction by Labor Day in the 6-8 biggest mega-cap names might not seen so crazy in the not-too-distant future!

So...if the tech stocks were not leading the market higher yesterday...what did? It was the small-caps. The Russell 2000 index rallied 3.5%...and outperformed the other major averages by a wide margin. On top of this, the Russell was also able to break out of a “symmetrical triangle” pattern and closed slightly above its 200 DMA, so yesterday was certainly a good day for the small caps. Of course, we’ll need to see some upside follow-through to confirm the move in the Russell. We’ll be watching the early June highs of 1537 (153 on the IWM). If the Russell 2000 can break above that level in any significant way, it will give it an important “higher-high” and confirm that the small cap stocks have finally got some momentum behind them once again. (2^nd chart below.)

Of course, it’s going to be very tough for any sector of the stock market to rally in a powerful way if the mega-cap tech names are going to see deep corrections over the next 6-8 weeks...and nothing will move in a straight line. However, we are definitely seeing signs that some rotation is going on in the market place. We saw it earlier in the week...with the move into the consumer staples (on Monday)...and yesterday with the strong rally in the small-caps......Two days does not make a trend, but if (repeat, IF) these trends continue...and the momentum behind some of the moves we’ve seen this week becomes more pronounced...it’s going to have a big impact on investor performance as we move through the 3rd quarter.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com

Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.